CEKD Berhad's (KLSE:CEKD) Stock Is Going Strong: Have Financials A Role To Play?

CEKD Berhad's (KLSE:CEKD) stock is up by a considerable 10% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on CEKD Berhad's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for CEKD Berhad is:

11% = RM8.0m ÷ RM75m (Based on the trailing twelve months to February 2025).

The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.11 in profit.

View our latest analysis for CEKD Berhad

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of CEKD Berhad's Earnings Growth And 11% ROE

At first glance, CEKD Berhad's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.0%, is definitely interesting. Yet, CEKD Berhad has posted measly growth of 4.9% over the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.

As a next step, we compared CEKD Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 5.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is CEKD Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CEKD Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 62% (that is, the company retains only 38% of its income) over the past three years for CEKD Berhad suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, CEKD Berhad only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we do feel that CEKD Berhad has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely achieved by the company reinvesting its earnings at a decent rate of return. Still, its earnings retention is quite low, so we wonder if the company's growth could be higher, were it to pay out less dividends and retain more of its profits? While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for CEKD Berhad by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.